Osterwalder et al. (2009) and the five business models with a focus on cloud computing

 As the title suggests the five business model patterns indicated in the book “Business Model Generation” are as followed.

 

1. Unbundling the Corporation
2. Long Tail
3. Open Business Models
4. Multi-Sided Platforms
5. Free-as-a-Business Model

 

Introduction to Cloud Computing

Cloud computing is services available on-demand online for users to access. Cloud computing includes social media sites like twitter, messaging sites like WhatsApp and companies who take the opportunities to scale like never before, such as Amazon or Google. Not often but many of these services are offered as a pay as you go such as Netflix or Amazon Web Services. This means users only pay for services while they need them. Such services are also scalable meaning they the virtually the same product can be offered in differing ways depending on what the user requires. 

 

Another thing that makes the cloud and digital-based products different from traditional products are that they can be sold many times. For example, the same piece of software from Microsoft can be sold many times as opposed to an item like food. Once a pizza is sold, it is gone another one needs to be produced to make another sale. 

 

Finally, cloud services vary from even traditional digital products. This comes in the form of democratisation of the latest technology. If we take the example of a video game-like Mario Cart, this product can only be used if the user has the correct Nintendo console or hardware to play the game. Now games can be played within browsers such as Chrome or Firefox. Traditionally users and business, in particular, would have to pay huge sums to pay to have the latest technology, for example, data storage and backups. Services such as IAAS, SAAS and PAAS have reduced the cost of such a service, meaning that even small companies can have access to the latest technology for a small fee, often paid as a subscription. 

 

1. Unbundling the Corporation

The first of the five mentioned patterns. This is the belief that businesses are broken down into three primary business types. These are;

1. Customer Relationship Businesses 
2. Product Innovation Business
3. Infrastructure Business

 

The words largest firms can be all of these things at once. With the rise of companies such as Amazon, Facebook and Google, we see them trying to become all things to all people are because of part of as many different market and customer segments as possible. But even for such big firms, the above business focuses are often kept separate. Similar to how companies like Pepsi own food brands but let each product seem like its own independent entity entirely.  

 

Customer Relationship Businesses tend to be B2B firms. These cloud-based companies tend to specialise in Customer Relationship Management systems. These firms include the likes of Monday.com, SAP or Salesforce. Many of these firms offer similar services such as using data to identify suitable business leads, gathering customer information and providing a simple to use platform for businesses to speak with their customers with inbuilt APIs such as messaging bots. Companies such as Salesforce effectively rent out a license of their software so that any firm or even individual can have the latest technology to run their business. 

 

Product Innovation Business: 

These firms specialise in creating new products and services. Some examples would include Apple with the creation of the iPhone as the world’s first touchscreen smartphone; Amazon is their electronic book reader known as the Kindle, Smartwatches or the digitalisation of SLR and film camera. Innovation also comes in the form of services such as streaming services like Spotify and Netflix that entertain demand. Due to research and development often the most prominent firms are the ones to develop the latest technology, but start-ups can majorly impact this type of market. Small start-ups like Spotify can even start a whole new market. 

 

Infrastructure Business

Infrastructure or IAAS tends to be dominated by some of the worlds biggest firms, such as Amazon (AWS), Microsoft (Azure) & Goggle (Cloud). Similar to customer relationship businesses, they make services available to smaller business and individuals that would not be available otherwise. The four services offered are virtualisation, access to servers, storage and largescale networking capabilities. This means smaller firms to do need to pay for the infrastructure of said services. They instead pay a subscription fee for their share of the network. 

 

2. Long Tail

The long tail pattern is in effect the scaling up and digitalisation of economies of scale. Economies of scale allow firms to hold a lot of different products and gather more stockpiles. This means they could sell certain products at a loss to drive our competition for one product while covering their losses with other products. 

 

Long-tail business patterns are mostly possible due to the digitalisation of new products and other products that were once physical. This digitalisation allows them to have a much broader level of stock that traditional brick and mortar stores. Often these products can be very niche and individually bring little demand and revenue to the firm. But, the old cliché of “the more, the merrier” stands true. 

 

The major advantage long-tail digital firms have over physical stores is of inventory costs. Old movie rental companies like Blockbuster or Extravision needed shelf space to show customers what they had. Each dick took up space and meant something else could not be there. This means every movie on the shelf needed to justify its presence by getting rented x amount of times a month/year. If it did not make the cut, it would be replaced with something else. If for example “Coach Carter” was only rented once in the next year a company like Extravision would take it off the shelf. If then, a week later a customer came in to rent that movie, it would be a missed opportunity for store and customer alike as the product is no longer available. If products are stored digitally, the storage costs of holding the same movie are almost zero. That means that Netflix could hold that same movie and the customer can enjoy it. 

 

The theory of the long tail is that in many cases the total aggregated sales of these niche projects can bring in more revenue for the firm than what is received from the firm's best-selling products. This is only possible for companies like Netflix and Spotify if they have flexible and scalable cloud services and infrastructure at their disposal. This means platforms like Netflix, Spotify and Kindle can take chances that older companies could not take and store more innovative products to see if it takes off. Old CD and DVD stores could not take those chances as they would have to justify holding the product over another. 

 

Firms like Netflix also have other advantages. These include reducing transaction costs. Netflix does not have to worry about a disk getting broken the same way an Extravision had to. Netflix also does not need to pay a staff member to be there to complete the transaction or to manage a store. 

 

The implications of this business pattern are one of if not the most prevalent of all the patterns discussed in this answer. When it comes to digital products that can be easily copied, brick and mortar stores will struggle to survive against the likes of Netflix, Disney, HBO and Spotify. To the point that they will be difficult to find. There will likely be less and fewer companies able to sell such products as users will go to who has the most high-quality content. To survive, some will have to adapt like Gamestop. When you go into Gamestop now, the majority of the store is selling plushies, bobbleheads and cards, not video games. 

 

3. Open Business Models

Traditional companies believed that they had all the answers. That all the smartest people worked for them and that information within the firm but by tightly protected. This attitude has changed in recent times, and this is led to open business models and open innovation. This could be seen as a very similar set up to the open-source software movement started by Linux. 

 

Companies have grown to realise that not all the smart people work for them and that getting ideas from outside the firm could be exactly what they need. Ideas can come from a much wider range of perspectives. Just because the problem is, for example, a software problem, does not guarantee that the best possible solution to a problem will come from a software engineer. This is why companies like google go out of their way to higher people from many different disciplines and backgrounds to maintain its place as one of the world’s most innovative companies. 

 

To feed into these ideas, more and more companies offer people the opportunity to submit ideas with the best ideas getting accepted. If this happens, the firm will have ownership of the IP of the design, but the person who came up with the idea will be rewarded financially. This is of benefit to people who have a great idea but perhaps don’t have the resources of a company to put the idea into action. 

 

One example of this is the T-Shirt Treadless. Thanks to cloud infrastructure, thousands of people can submit T-Shirt designs to the company. These shirts are put online for users to vote up or vote down. The more positive feedback a design gets, the more likely it will be put into production. If it is put on the website for sale, designers may take some of the profit or even be hired by the firm. This reduces potential inventory costs for Threadless as the business has a great insight into what products will have a demand. This significantly reduced the chance that they will mass-produce a product that will prove unpopular and waste money and storage place.   

 

An example that Osterwalder’s book points to as that of Lego. While the Business Model Generation speaks about Lego in the context of the long tail, but they have also conducted open innovation. With the use of contest, people can submit designs that they would like to see Lego make. Accepted ideas will likely to put into production and contestants will win a prize. For example, contestants were asked to submit ideas about Manchester United and their stadium Old Trafford. The three top submissions won prizes. (Lego) Ideas 2020)

 

4. Multi-sided Platforms

These business patterns are subject to the networking effect. The networking effect is when a project gains in value and increased usefulness the more users are actively using the service. In other words, while the service itself is valuable, if it were nobody at all would use it, but at the same time, it would be almost completely useless if it only had one used. The platform adds it value my simply allowing the interaction between to users. 

 

A modern digital example of this is social media sites such as Facebook, YouTube and Twitter. There is little point of tweeting your opinion of a sports game is nobody reads it, or there is no point of uploading a video on YouTube if there is nobody there to view it. 

 

Open business models are platforms that encourage users to use the service as much as possible. This means that the services are often free to use. Although this is starting to change with the introduction of YouTube red which allows users to use the service without ads in return for a monthly subscription fee. 

 

Search engines like Google search and Yahoo follow a very similar model. Like social media the service is free. But while social media sites are primarily about connecting users to each other users, search engines allow users to search for information on the internet. Both make their money their money by monitoring users actions online and creating a profile of users. This information can then be used to recommend products to users connecting them with products they may be interested in. Lastly, many news sites such as the Financial Times and the Irish Independent use banner adds to generate from a free to access a website.

 

What all of these platforms have in common is that they bring different groups of people together. If we take Twitter, for example. Users may sign up to follow their favourite movie star. They may also, after joining decide to follow their favourite sports team. Both will have followers for the original user to connect with. If a user went to the cinema, they would be unlikely to get any sports influence and vice versa. But a service like Twitter brings all these types of users together in one place. 

 

Services such as Facebook groups will likely reduce the need for people to attend their local club, for example, why pay for a membership to a local photography club when you can join “Munster Landscape Photographers” on Twitter for free. There like a traditional camera club you can see wonderful images, meet new people and arrange trips just like in person. 

 

5. Free-as-a-Business Model

This is when a service for many customers is free to use. This free version of a software is a restricted version. But if you are willing to pay a fee, you will get access to all the features. This model is known as a “freemium” business pattern.

 

For example, users can join Spotify for free. But unless users pay the subscription fee, they will only be able to skip a few songs a day and will be bombarded with ads in between songs. This particular approach aims to get users to use enough of the service that they want to continue using it. Still, the interruptions should be annoying enough that people will eventually pay for the service. The basic premise is that is consumers have tried a product and liked it they will be more likely to buy it than someone you can’t access it in the first place. The free version of the software is possible to provide to people as already paying customers are covering the costs. 

 

Businesses know that the demand for a product that is seen as free is much higher than a product will even a small price for a piece of software like €1. This is also a standard feature for video games and mobile video games in particular. For example, the Simpsons Tapped out. The game has two currencies dollars and doughnuts. The game is free to play, and users can, in theory, reach the most recent level all while playing for free. The object of the game is to build Springfield. Each new level comes with new items, buildings and characters. Regular items can be bought using in-game dollars generated over time. But premium products can only be purchased with doughnuts. For each of the 124 levels passed, users get a prize of one doughnut. But many premium products could cost upwards of 150 doughnuts. This means a huge proportion of the game is impossible to achieve unless users buy doughnuts in the game. Desperate town planners will be willing to make a 20 plus dollar purchase here and there to get access to new items. If users are addicted enough, they will spend much more money than the traditional €50-60 that users would have paid for games before. Page 96 of the Business Model Generation book states that if an app can get 10% of players to be paying players, then they will be able to cover the costs of the other 90%. All of this is possible due to the cloud. With storage prices continuing to fall, non-paying customers are becoming less and less of a burden. Companies such as Playrix amongst others in the mobile gaming companies and are more than happy to take the chance that paying customer income will be more than the costs of hosting free players. 

 

In terms of gaming, I can see this model reaching more and more games. Perhaps in the future Fifa, 2025 games on Xbox and PlayStation will be free to download and play with two teams. But to get to use all the Premier League teams you will need to pay €10 and another €10 for Serie A, €20 to play career mode and so on. 

 

This sort of model has already hit news providers like the Athletic and the Economists. It will likely only be a matter of time before buying the daily newspaper is a thing of the past, and we are all playing x amount a month/year to get the paper within an app or perhaps even sent to us as a PDF file each morning. 

 

Conclusion

In conclusion, the book Business Model generation lays out five key business patterns. These patterns have been facilitated by the rise of cloud and democratisation of IT capabilities. Many of these patterns are part of larger business models and could be seen as business models in themselves. While the five patterns vary, they all would not be possible without modern IT. They have all changed the chances, and losses businesses are willing to take to make a profit while another new technology has dramatically reduced the level of risk on the side of said businesses.

 

  

References: 

Lego Ideas (2020) https://ideas.lego.com/challenges/3b2471e7-52d6-4d19-b0d1-03d974058c7b?query=&sort=top